Your Business News
Taxing the digital economy – are we all on the same page?
March 22, 2023
Authored by RSM Canada LLP
Gracie Tetzlaff CPA, CA shared this article
ARTICLE | March 22, 2023
The Organisation for Economic Co-operation and Development (OECD) is working towards a multilateral agreement on taxation of the digital economy. Taxpayers who sell digitally should follow developments closely for impacts to the middle market.
In October 2019, the OECD announced that they are aiming to reach an agreement by 2020. Two years later, the OECD announced that 136 countries, including Canada, agreed on the elements of the landmark two-pillar plan on international tax reform. In February 2023, the OECD General Secretary announced that they are aiming to finalize a new multilateral convention on digital tax by mid-2023, for entry into force in 2024.
With no multilateral agreement in place, several countries have introduced domestic tax rules to govern the digital economy as they are not willing to lose out on tax revenue while waiting for such an agreement. Even once the agreement comes into force, countries may still impose domestic taxes on the digital economy to close gaps left by the multilateral agreement.
OECD’s Two-Pillar approach to combating tax challenges from the digital economy
The OECD has introduced a Two-Pillar approach to deal with tax challenges from the digital economy. The primary objective of Pillar One is to ensure that large and highly profitable Multinational Enterprises (MNEs), including digital companies, pay Digital Services Tax (DST) wherever they have significant consumer-facing activities and generate their profits. This project is part of wider efforts to restore stability and certainty in the international tax system, address possible overlaps with existing rules, and mitigate the risks of double taxation.
Pillar Two aims to implement a global anti-base erosion rule through the introduction of a global minimum corporate tax rate of 15 per cent that countries can use to protect their tax bases.
Canada has proposed a 3 per cent Digital Services Tax on companies that reach a certain threshold as an interim measure allowing Canada to capture potentially lost tax revenue from the digital economy until it enters into a satisfactory multilateral agreement. The tax will not be imposed any earlier than January 1, 2024, and only if no multilateral agreement is entered into by then. If the tax is imposed, companies would be required to remit tax in respect of revenues earned as of January 1, 2022. As such, companies in the online entertainment sector, e.g., Netflix, Amazon Prime, Spotify, etc., are bracing for a potentially large tax bill in about a year’s time.
EU’s and India’s Approach
While countries in the EU establish their own tax laws, creating laws that uphold the principles of the EU has encouraged a unified approach to digital taxation. However, the EU DST proposal hit a roadblock in 2019. Since then, many EU member nations have implemented or are in the process of implementing a DST at the country level. As of January 2023, Austria, France, Hungary, Italy, Poland, Portugal, Spain, Turkey, and the UK have implemented a DST; while Belgium, the Czech Republic, and Slovakia have published proposals to enact one, and Latvia, Norway, and Slovenia have either officially announced or shown intentions to implement such a tax.
The proposed and implemented DSTs differ significantly in their scope and structure. For example, while Austria and Hungary only tax online advertising revenues, France’s tax base is much broader, including revenues from the provision of a digital interface, targeted advertising, and the transmission of data collected about users for advertising purposes. The tax rates range from 1.5 per cent in Poland to 7.5 per cent in both Hungary and Turkey (although Hungary’s tax rate is temporarily reduced to 0 per cent).
Notwithstanding individual measures undertaken by several EU member nations, a common approach likely will not be discarded especially with the proposal of a single corporate tax rulebook for the EU, Business in Europe: Framework for Income Taxation (BEFIT) in 2021.
Meanwhile, India unilaterally introduced an equalization levy (EL) of 6 per cent in 2016 which applies on non-residents engaged in online advertisement and related activities with Indian customers (Finance Act 2016). India further introduced a 2 per cent equalization levy on amounts received/receivable by a non-resident e-commerce operator from e-commerce supply or services effective April 1, 2020. This new tax applies to all businesses with India source revenue exceeding 20M Indian Rupees (approximately $250,000 US Dollars) unless that e-commerce supply or service effectively relates either to a permanent establishment in India or is subject to the original EL of 6 per cent on advertising services.
Beyond Pillar One
The OECD’s Two-Pillar approach has a fairly limited scope. For example, Pillar One would only apply to multinational enterprises with global turnover above EUR 20 billion and profitability above 10 per cent based on a particular calculation method. There are many companies operating in the digital space providing either goods or services which fall below this threshold. It is unlikely countries would be willing to accept the potential tax revenue lost from these taxpayers. As such, middle market digital companies can expect individual countries to propose and/or implement domestic DST rules that will apply in parallel to the OECD’s Two-Pillar approach.
Call us at 1 855 363 3526 or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by Nakul Kohli, Cassandra Knapman and originally appeared on Mar 22, 2023 RSM Canada, and is available online at https://rsmcanada.com/insights/services/business-tax-insights/taxing-the-digital-economy-are-we-all-on-the-same-page.html.
The information contained herein is general in nature and based on authorities that are subject to change. RSM Canada guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM Canada assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.
FCR a proud member of RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.
For more information on how FCR can assist you, please call us at 1 855 363 3526